With so much in flux in the new car industry and the credit crisis, many dealers are looking to the buy here, pay here segment of the auto industry to grow their business. In order to help our dealer readers learn more about this segment of the auto industry, we interviewed Troy Cavallaro, the founder of Pelican Resource Group, LLC, a leading provider of servicing solutions for sub-prime automobile receivables.
What are the trends driving the subprime auto industry?
I think it’s a unique point in time right now in the subprime auto industry. I started in the subprime industry in ’93, which was in the beginning of numbers going after the subprime or indirect lending and it peaked in the early 2000s, and now unfortunately due to the frozen credit market, there has been a lot of lenders, such as Fireside, Wells Fargo, and HSBC that have collapsed. That has clearly led us to where we are today. The whole industry has come full circle. We’re not back to the infancy, but we’re close to it.
What’s happening really started with the mortgage business and it’s trickled down to all financial services, including autos and basically any asset backed security…leading to more and more people having negative impacts on their credit. So it’s actually creating a bigger supply of subprime customers, [but] the subprime lenders are drying up, so it’s a supply and demand thing, where we have more demand from more customers needing cars, subprime customers in particular, because more people are having damaged credit and there’s not enough supply of lenders. What we’re seeing here is a trickledown effect, where the new car dealers are having more and more difficulty getting people funds, especially under a 600 credit score. This creates an ever increasing buy here, pay here market. We saw this, and what we wanted to target was creating a win-win solution, where we can help dealers sell more cars by entering this market and customers can drive cars that they otherwise couldn’t drive. That’s really where we’re at in terms of the industry.
What have you found is the biggest challenge dealers face getting into the buy here, pay here industry?
A lot of dealerships, quite frankly, get frustrated very quickly, especially the new car franchises, because they have to secure the inventory. A lot of the basic used car dealers and the super used car operations have access to that through trade-ins. These traditional buy here, pay here cars typically are being over booked at the auction. So the key is getting the cars, that’s number one. Number two is setting up an operation where you have the ability to sell the cars, which is advertising and marketing, collect the payments, and know where your collateral is. All that being said, it really takes a professional, whether it’s a dealership professional or someone who’s schooled in it, for the dealership to be successful. For a dealership just trying to jump into it quite frankly, there’s a lot of moving parts and they can get frustrated very quickly, because of the fact that it’s difficult and labor intensive. Dealers are used to selling the cars, signing the contract, getting paid, and then basically selling service and maintenance to the customer. With buy here, pay here it’s a lot more than that. If you want to sum it up, it’s a little extra work unless they hire a provider, but there’s a huge windfall at the end of it. Dealers have to put a little in, but they can get a lot out.
Do the majority of dealerships that get into buy here, pay here find success?
A lot of them find success if they do it right. If they follow the prescription on how to do it right, a lot of dealers are very successful with it. It’s such a huge market, new car dealers see these customers every single day. The dealerships have a huge opportunity to turn wholesale pieces into retail profits. They have to do it effectively, by advertising, by properly hiring or selecting a company, and they can really turn that wholesale collateral into resale profits. It can be a whole new profit stream for the dealer.
Do you market differently to the subprime market than the prime market?
At this point, more and more consumers every day have tarnished credit, so I would say stick with the same mix, but start emphasizing the fact that they help these types of consumers. There’s this trickledown effect that we’re seeing, so we’re probably going to see this trend continue in terms of more buy here, pay here type customers continue for at least the next 18-24 months. So to answer your question, I would say that I would take your traditional marketing sources and just add a mix of subprime advertising.
With more dealers moving into buy here, pay here, what piece of advice do you wish you could tell them before they start?
I would say they should either hire a company or hire an expert that is very familiar with how to do it right and how to make it successful. Don’t try and dabble in it; do it the right way the first time.0
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